Sweden and Norway recently ended almost all remaining social restrictions amid a high uptake of COVID-19 vaccines and a corresponding drop in infections, allowing businesses to thrive.
After plunging when the coronavirus hit last year, the currencies have recovered to trade slightly stronger against the euro than their pre-pandemic levels. They will continue to rise, but the likely scope of gains is more limited, the poll showed.
Norway’s crown has rallied about 6% since late August to trade at around 9.94 against the euro and could move to 9.83 in the coming year, the poll showed, which would be its strongest level since January 2020.
Analysts attribute the crown’s lift in recent weeks to hawkish monetary policy and a surge in the price of Norway’s oil and gas exports.
Norges Bank last month raised rates for the first time since 2019 and plans four more hikes over the coming 15 months, with the next tightening pencilled in for December.
But the often-volatile Norwegian currency is also at risk of periods of decline and is forecast to be weaker than its current level at the end of 2021 before rising again next year.
“NOK is no safe haven in troubling times and could easily weaken if sentiment in markets sours,” Nordea Markets cautioned.
In Sweden, where the currency has weakened slightly against the euro this year, the crown is expected to make gains over the coming 12 months to hit its strongest level since early 2018, the poll showed.
The Riksbank has held its benchmark repo rate at 0% and expects to keep it there for several more years despite strong economic recovery and above-target inflation.
Nonetheless some economists see the rebound in the Swedish economy as an opportunity for the central bank to tweak its overall monetary policy approach in 2022.
“The stars are starting to align behind our view that policymakers will start to allow the balance sheet to contract next year,” Capital Economics said in a recent note to clients.
The Reuters poll predicted the Swedish currency would make gains of around 2.5% against the euro to trade at around 9.92 one year from now, the median forecast showed.
Brent crude has hit new three-year highs above $80 a barrel after OPEC+ producers stuck to their output policy despite pressure to pump more oil. Record high gas prices and below-average European inventories portend a winter of higher heating and power bills for consumers and small businesses alike.
China’s property sector problems and a power crunch that’s idling factories meanwhile pose a threat to economic growth; developer Fantasia has joined Evergrande in missing a coupon payment and borrowing costs for “junk”-rated Chinese firms have soared.
Now add in the risk of a default in the world’s biggest economy. This according to Moody’s could cause U.S. economic activity to shrink nearly 4%, eliminate at a stroke 6 million jobs and lift unemployment towards 9%.
All that is keeping U.S. 10-year bond yields well below three-month highs touched last week while sending up shortest-dated borrowing costs — one-month Treasury bill yields are at the highest since last October.
U.S. credit default swaps, derivatives investors often use to hedge exposure, have risen to one-year highs.
Energy costs, together with a dollar standing near one-year highs, will inevitably tighten global financing conditions, even as more central banks start to remove pandemic-time stimulus.
The Federal Reserve will almost certainly start unwinding stimulus from next month and New Zealand on Wednesday is expected to become the second developed country after Norway to hike rates.
Wall Street is attempting to claw back some of its losses from Wednesday when the Nasdaq plunged more than 2%. Futures are pointing higher there and European shares just opened firmer, although Japan’s Nikkei slipped to one-month lows.
Key developments that should provide more direction to markets on Tuesday:
–The Reserve Bank of Australia held their monetary policy unchanged in its Tuesday meeting, as expected.
–Japan’s services sector activity shrank for a 20th straight month in September
-UK passenger cars data
-BOE’s Dave Ramsden speaks
-ECB board member Fernandez Bollo speaks
-Fed speakers: Richmond Fed’s Thomas Barkin, Vice Chair for supervision Randal Quarles
U.S. 10-year Treasury yields were last at 1.484%, down nearly six basis points. For the week, the dollar index posted its largest percentage gain since late August, as investors looked to the Federal Reserve’s reduction of asset purchases in November and a possible rate hike late next year.
Cautious market sentiment due to COVID-19 concerns, wobbles in China’s growth and a Washington gridlock ahead of a looming deadline to lift the U.S. government’s borrowing limit has lent support to the dollar, seen as a safe-haven asset.
“The more hawkish stance appears to have been the key factor driving the dollar higher in late September,” said Marc Chandler, chief market strategist, at Bannockburn Global Forex.
“However, more immediately, fiscal policy is the focus, though investors appear to be looking through it, as many find it inconceivable that the U.S. would default on its debt,” he added.In afternoon trading, the dollar index slid 0.3% to 94.046, having gained 0.8% this week, the largest weekly rise since late August.
Friday’s batch of U.S. data was mixed, adding to dollar weakness ahead of the weekend. U.S. consumer spending increased more than expected in August, posting a 0.8% rise, but consumption was weaker than initially thought in July, dipping 0.1% instead of gaining 0.3%. Inflation remained elevated, but not by much.
Core inflation as measured by the personal consumption expenditures (PCE) price index, excluding the volatile food and energy components, was up 0.3% in August, unchanged from previous month. In manufacturing, data was more upbeat. The Institute for Supply Management (ISM) said its index of national factory activity increased to a reading of 61.1 last month from 59.9 in August. In other currencies, the euro rose 0.1% to $1.1595, falling about 1.1% for the week, its biggest percentage fall since mid-June.
The yen bounced back against the dollar from a 19-month low overnight, with the greenback last down 0.2% at 111.105 yen. Commodity currencies rallied against the U.S. dollar on Friday as well. The Australian dollar gained 0.6% to US$0.7270 and slumped 3.6% in the third quarter – the worst performance of any G10 currency against the dollar – as prices for Australia’s top export, iron ore, fell sharply. Sterling was also an underperformer last quarter, dropping 2.5%, and posting its worst week in more than a month, amid growing supply chain problems. [GBP/] Sterling was last up 0.6% though at $1.3552, just above a 9-month low at $1.3516.
In cryptocurrencies, bitcoin rallied to a nearly two-week high of just under $48,000. It was last up 9.4% at $47,902. Analysts cited seasonal factors, with the fourth quarter typically viewed as a bullish period for digital assets.
Smaller coins ether and XRP, which tend to move in tandem with bitcoin, were up nearly 10% at $3,294 and 8.2% at $1.0299, respectively.
The greenback overall has been supported by the spike in U.S. Treasury yields amid expectations the Federal Reserve will taper its monetary stimulus beginning in November even as global growth slows.
Thursday’s economic data, though, dented some of the dollar’s strength.
U.S. initial jobless claims rose for a third straight week to 362,000 for the period ending Sept. 25, data showed. Economists polled by Reuters had forecast 335,000 jobless applications for the latest week.
That said, another report confirmed that U.S. economic growth accelerated in the second quarter, at a 6.7% clip, thanks to pandemic relief money from the government, which boosted consumer spending.
“Even if the U.S. dollar falls back a bit further in the near term, we expect it to resume its recent rally in due course,” Joseph Marlow, assistant economist at Capital Economics, wrote in a research note.
“Although long-term yields have risen in most major economies, U.S. bond yields have increased by more than most and, importantly, been driven in large part by higher real yields, reflecting expectations of tighter monetary policy.”
The dollar index, which measures the currency against a basket of six rivals, hit 94.504, its highest since Sept. 28 last year. It was last down 0.2% at 94.199.
For the month, the dollar ended up 1.7%, its second straight monthly gain. For the third quarter, the dollar rose 2%.
Marc Chandler, chief market strategist at Bannockburn Forex, in a research note wrote that “a consolidative tone is evident” after the dollar’s surge on Wednesday.
The dollar’s recent gains came despite a political standoff in Washington over the U.S. debt ceiling that threatens to shut down much of the government.
Yields on the benchmark 10-year Treasury note stood at 1.524%, holding near a three-month high reached Tuesday of 1.567%.
The dollar hit 112.07 yen, the highest since February 2020. It was last down 0.5% at 111.36 yen, its biggest daily percentage fall since mid-August.
For the month of September, however, the dollar posted a 1.2% gain versus the yen, and a more modest 0.4% rise for the third quarter.
The euro was down 0.1% at $1.1586, after earlier hitting $1.1563,its lowest since July 2020.
Europe’s single currency was down 1.9% against the dollar for the month and 2.2% weaker for the third quarter.
The risk-sensitive Australian dollar firmed 0.8% to US$0.7232, after plummeting 0.9% overnight, as iron ore prices rallied ahead of the Golden Week holiday in Australia’s top trading destination China.
A slight improvement in overall risk sentiment after days of gloom was seen in the cryptocurrency markets, as bitcoin rose 5.7%% to $43,929 and ether bounced 6.2% to $3,028. Both coins are down between 20% and 27% from their September peaks.
The greenback also fared well despite an impasse in Washington over the U.S. debt ceiling that threatened to plunge the government into a shutdown.
The world’s largest reserve currency, seen as a safe-haven bet at times of market stress, has strengthened in recent days as investors instead focused on fears of a global slowdown, a rise in energy prices and higher U.S. Treasury yields.
Traders are also concerned that the Fed will start to withdraw policy support just as global growth slows.
“Fed has sounded the starting gun on monetary policy normalization,” Kit Juckes, macro strategist at Societe Generale, wrote in his latest research note.
“As the U.S. escapes the interest rate zero-bound, leaving the Eurozone and Japan behind, the global savings glut is set to be drawn towards the dollar, which can outperform the majority of other currencies in the coming year, and may start its move earlier than we expected,” Juckes added.
The dollar index – which measures the U.S. currency against a basket of six major currencies – rose for the fourth consecutive day, to 94.435, its highest since late September of last year. It was last up 0.7% at 94.404.
Erik Nelson, macro strategist at Wells Fargo in New York, sees a further 2% to 3% upside in the dollar index.
The greenback was also unfazed, even as U.S. Senate Republicans on Tuesday blocked a bid by President Joe Biden’s fellow Democrats to head off a potentially crippling U.S. credit default, with federal funding due to expire on Thursday and borrowing authority on around Oct. 18.
The Senate could vote on Wednesday or Thursday on a bipartisan resolution to fund federal operations through early December, Senate Majority Leader Chuck Schumer said.
The euro was among the currencies to lose ground, falling below the $1.16 level, the lowest since late July 2020. It last traded down 0.8% at $1.1592.
The yen showed little reaction to the election of Fumio Kishida as leader of Japan’s ruling Liberal Democratic Party, which put him on course to become the country’s next prime minister.
The yen, the currency most sensitive to U.S. yields as higher rates can attract flows from Japan, touched an 18-month low against a resurgent dollar. The dollar climbed as high as 112.04, its strongest level since late February last year, and was last up 0.4% at 111.99 yen.
The dollar also rose to a more than five-month high of 0.9355 francs. It was last up 0.7% at 0.9351.
Currency traders also took note of comments from major central bankers on Wednesday, who were panelists at a European Central Bank forum in Sintra, Portugal.
Fed Chairman Jerome Powell, European Central Bank President Christine Lagarde and Bank of England Governor Andrew Bailey said they were keeping a close eye on inflation amid a surge in energy prices and the persistence of production bottlenecks.
Market sentiment has been rattled by the potential contagion from Evergrande, which is trying to raise funds to pay a host of lenders, suppliers and investors. A deadline for an $83.5 million interest payment on one of its bonds is due on Thursday, and the company has $305 billion in liabilities.
On Thursday, the yuan strengthened to its highest level in three months at 6.4226 per dollar before starting to reverse as Evergrande’s woes worsened. The move sharpened on Monday after warnings from Chinese regulators that the company’s insolvency could fuel broader risks in the country’s financial system if not stabilized.
Analysts at Wells Fargo said on Monday they expect the dollar to reach 6.60 per yuan within the next month. The offshore Chinese yuan last weakened versus the greenback at 6.4839 per dollar.
“We are seeing a classic flight to safety in the dollar until we get some sense of clarity on whether or not it is going to be an orderly or disorderly resolution to Evergrande,” said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington DC.
“We were likely to see a continuation of the decline we’ve seen in risk assets going into this week and you throw in Evergrande and it has really unsettled the markets.”
The dollar and other safe-haven currencies such as the yen and Swiss franc gained with the risk-off sentiment, which saw Wall Street’s S&P 500 index on pace for its biggest one-day percentage drop 11 months.
The dollar index rose 0.025%, with the euro unchanged at $1.1725.
The dollar has also been gaining ground on expectations the Federal Reserve will begin reducing its monthly bond purchases this year, with the central bank’s policy announcement due on Wednesday.
Aside from the Fed, multiple central banks around the globe will hold policy meetings this week, including those of Sweden, England, and Norway.
The Japanese yen strengthened 0.58% versus the greenback at 109.32 per dollar, while sterling was last trading at $1.3656, down 0.63% on the day.
The Canadian dollar, also a commodity currency that correlates with risk sentiment, weakened to as low as C$1.2895 per dollar, its lowest level in four weeks. It last fell 0.42% versus the greenback at C$1.28 per dollar.
Polling for Monday’s national election in Canada points to an advantage for incumbent Prime Minister Justin Trudeau, but he is unlikely to gain a parliamentary majority.
In cryptocurrencies, bitcoin last fell 7.76% to $43,577.67.
“The reopening of society is well underway, and the upswing in the Norwegian economy continues. The COVID-19 pandemic will nevertheless continue to impact on the economy for a long time to come,” SSB said.
“The first interest rate jump is expected to be in September.”
Non-oil gross domestic product (GDP) will rise by 3.6% in 2021, the agency predicted, more than the 3.1% growth seen in June, while next year will see expansion of 3.8%, down from 4.1% predicted three months ago.
SSB at the same time raised its growth forecasts for 2023 and 2024.
The Norwegian central bank last year slashed rates to a record low 0.0%. It has said it intends to hike twice this year and three times in 2022, likely beginning at its next policy meeting on Sept. 23.
The key policy rate will likely rise to 1.75% in 2024, SSB predicted, in line with the agency’s previous forecast.
Statistics Norway’s forecasts are based on authorities expecting to fully vaccinate some 90% of adult Norwegians over the next four to six weeks, SSB said.
“If these assumptions are not fulfilled, further economic recovery will take longer than our calculations show,” it said.
New Zealand’s central bank meets on Wednesday and looks set to become the first major economy to lift interest rates since COVID-19 hit.
Super-strong jobs data have cemented expectations of a hike, which would be New Zealand’s first since mid-2014. What a contrast with 2020, when rates were slashed 75 bps to 0.25% and a move below zero became a real possibility.
Norway’s central bank, meeting on Thursday meanwhile, could reiterate it will increase rates in September.
Investors, focused on prospects for Fed tapering as labour conditions improve, have boosted the dollar. New Zealand and Norway are a reminder that the greenback is not the only currency standing to benefit from the monetary policy shift under way in the G10.
– New Zealand inflation expectations jump in Q3 -RBNZ
The U.S. economy is growing robustly and the labour market is rebounding. However, COVID-19 remains a headwind and coming days should bring a fresh perspective on how consumers are faring.
U.S. retail sales likely fell 0.2% in July, after an unexpected rise in June, data on Tuesday is expected to show.
And several large retailers including Walmart, Target, Lowe’s and Home Depot will report quarterly results. Earnings are due too from Ross Stores, TJX Companies and Bath & Body Works.
These come at the end of a stellar U.S. second-quarter results season. S&P 500 earnings are expected to have jumped 93.1%, well above prior expectations of 65.4%, according to Refinitiv IBES.
Fed policymakers, assessing when to start unwinding stimulus, will be watching.
-Fed officials grapple over timeline for tapering asset purchases
3/ DELTA BLUES
The Delta variant is close to breaching Asia’s COVID-zero fortresses, with outbreaks and lockdowns looming over what once appeared the world’s most promising regional rebound.
Save for Taiwan and New Zealand, where strict border controls appear to have kept the variant at bay, cities from Sydney to Seoul are finding it hard to contain infections.
In China, Delta has been detected in over a dozen cities, bearing down on a faltering economy, forcing economists to cut growth forecasts.
Data on Monday only adds to signs that the economic recovery is losing momentum – China’s factory output and retail sales growth slowed sharply and missed expectations in July.
– China economy under pressure as factory output, retail sales growth slow sharply
– Wall Street investment banks cut China growth forecasts
4/ APOCALYPSE NOW
If this summer has shown us anything, it’s a glimpse of the sort of havoc the planet faces if the climate emergency is not fixed fast.
Apocalyptic forest fires, floods and drought are laying waste to swathes of Greece, Canada, Turkey, China, Argentina and the United States. Extreme weather consequences include deaths, homelessness, social unrest and rising government debt.
The climate emergency will raise costs everywhere: insurance covers just 60% of disaster-linked losses even in rich North America; it falls to 10% in China, Swiss Re estimates. Worse still, the fires are exacerbating emissions, while forests meant to act as carbon sinks will take decades to regrow.
Until now, warnings, including a recent United Nations one, have had limited impact. But with a global climate conference due in November, this summer’s climate disasters might well swing the pendulum.
-U.N. sounds clarion call over ‘irreversible’ climate impacts
5/ AFGHAN ABYSS
The Taliban have declared the war in in Afghanistan over after taking control of the presidential palace in Kabul, raising alarm over Afghanistan’s future and the wider spillover in what is already a dangerous neighbourhood.
Iran to the west, the central Asian republics of Tajikistan, Turkmenistan and Uzbekistan to the north may be at risk, but for markets, Pakistan to the east will be the immediate focus.
Pakistan has lots of debt and a sizable equity market. It also depends on a $6 billion IMF programme. The prospect of years of Taliban violence and mass waves of Afghan refugees will add to the struggle to repair its finances.
– Taliban declares ‘war is over’ as president and diplomats flee Kabul
– IMF says Pakistan talks ongoing; more work needed on structural reforms
The 2 major risk events of the past 9 months continue to be the key drivers of FX risk trading.
Caseloads of COVID-19 and a possible vaccine to it.
The US presidential election.
The second point has now officially been ‘declared’ with President Trump finally allowing a transition process to President-Elect Biden to begin. This was probably seen as an ‘unexpected’ outcome considering the Trump team is still pursuing legal challenges in several of the swing states yet to official declare.
However, with Georgia officials declaring this week if there will be any legal challenge remaining, that could, in theory, be successful in the remaining states. Yet, it would still not be enough to get Trump to 270 electoral colleague votes that are needed to be re-elected. This ‘risk event’ is now officially over. However, the Trump presidency is not – that is still official until January 19 and there are still some risks here.
Is it time to go for risk-on markets?
The reaction to Trump’s concession was one of risk-on, the equity market made record highs in the US and the USD fell against all G10 currencies on the news, with risk currencies in the form of the AUD, NOK and SEK being the biggest movers.
AUD/USD is again through $0.73. While FX strategists at UOB group predicts that the pair may break above 0.7400 in 1-3 weeks’ time, the question for it over the final week of 2020 is will the risk levers continue to push it higher? And, will that mean a year-end target of $0.75 is still possible? The macrothematics suggest yes, but real events could still be a headwind.
Namely COVID-19 cases.
That first point is really the major catalyst now for further risk rallies or pull backs, and as discussed in last week’s note caseloads are still growing almost exponentially in the US and Europe, not to mention that global cases have already surged past 60 million, which is weighing on short-term confidence.
Beware of short-term risks
Case-in-point: the US consumer confidence fell to back into pessimism in November to 96.1 from 101.4 (100 is equilibrium). Future expectations deteriorated (fell to 89.5 from 98.2) specifically due to a resurgence in COVID cases and the subsequent restrictions. The Richmond Fed manufacturing survey for November fell more than expected, to 15 versus estimates of 20 and well down on last month’s record high of 29, most components slipped and the most notable was new orders down to 12 from 32.
Major events that can bring volatility to the markets in the remaining weeks of this year:
December 10 – Vaccine Development: Some sources suggest that Emergency Use Authorization for both Pfizer and Moderna vaccines may potentially be approved on this date
December 14 – US Presidential Election: Members of the Electoral College will meet and cast their ballots for president and vice president
December 31 – Brexit: End of the transition period
This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.
S&P500 and NAS futures opened a little lower, but have come roaring back with Asian equities firing up nicely, despite selling in crude futures.
Certainly, the MXN has worked well of late, and it feels like in the absence of a pullback in stocks and a further reduction in implied vol that USDMXN heads for 23. EURMXN could push through the 50-day MA (25.64) amid the favourable environment for carry positions, although, much still depends on price action in crude which, as I say is giving back some of last week’s 25.1% rally. I also went short EURAUD as a trade and feel the downside has opened up nicely here – here is my trade rationale.
AUDUSD continues to have lock-on on the S&P500 futures, with the US equity benchmark putting on 3.5% last week, dwarfed only by a 6% and 5.5% rally in the NASDAQ and Russell 2000, respectively.
On the daily, the S&P500 will be eyeing a break of the 29 April high of 2954 and from we make an assault at 3000, which is obviously the round number, but the 100- and 200-day MA also sit here too. We are also told this is the line, where the CTAs (trend-following funds) flip to increase long positions in S&P500 futures, a development that could take us materially higher.
Looking at 5-day realised volatility in the S&P500, we see it has come down to 16.4%, from a high of 176% (17 March) and we’re back to pre-crisis levels and one suspects if vol sellers push the VIX closer to 20% (currently 27.98%), vol-targeting funds then enter the fray too.
White – S&P500 5-day realised volatility/RV, orange – 30-day RV
This, again, would be positive for risk FX such as the NOK, AUD, NZD, MXN and ZAR.
I have been guilty of not wanting to chase this rally in equity indices, but the lack of any follow-through in the selling (pick up in vol) has certainly lowered the impulse to short risk. I do see us moving past peek stimulus inspiration, with the Fed’s balance sheet growing at an ever-slower pace, as they do for other central banks, although the commitment to do more should we see a second wave in the corona virus is key.
On the fiscal side, the US House is due to vote on a Phase 4 bill on Thursday, rumoured to be close to $750b, and it’s uncertain that will pass, with Trump making it clear he wants to tie this in with a payrolls tax cut.
It is also clear that this is not a time for thinking too intently about valuation, with the S&P500 commanding an incredible 23.06x 2020 earnings, while 2021 FY earnings sit at 18x – economics have not played into considerations either. These are markets boosted by actions from the Fed to support credit and liquidity more broadly.
Re-positioning from hedge funds, specifically the systematic and rules-based crowd has been key and will be the reason, if it happens for new highs in US equity markets.
Consider that cash in money market funds, the safest of safe, has grown 30% since March, so there is still a ton of cash on the sidelines.
We can also look at the futures position in S&P500 futures held by non-commercial players and see this held net by short 222k contracts – that’s the largest net short positions held since 2015 and over two standard deviations of the 10-year average.
Total US$ value in money market funds
The disconnect between economic reality and valuation is keeping a lot of discretionary players from entering the market here, and that is fair as it feels incredibly wrong to buy risk – I guess that is one of the many reasons why a systematic approach can work in one’s favour.
So, we watch the S&P500 and NAS futures through Asia, where both markets were down smalls early doors and are coming back to the flat line as I type. There is little to trouble on the data side, although tomorrows (22:30aest) US CPI could be interesting with headline expected to drop 0.8% MoM and core -0.2%, amid a fierce debate on whether we get inflation or deflation as a result of COVID-19.
Retail sales (Friday 22:30aest) would typically get a strong look-in, and calls for an 11.7% decline won’t go unnoticed, but just as we saw with the 20m jobs lost in Fridays NFP and the failure to move markets; economic data at the moment is largely irrelevant, at least for markets – who will be looking intently on re-openings in the US and Europe, with plans to do so in the UK, Australia and others.
What could be important is the raft of Fed speakers this week, which you can see on the calendar below. Fed chair Powell mid-week speech will be the highlight, especially, with all the talk of negative rates that were priced into the rates market most intently on Thursday. In a crisis, you leave everything on the table, and things move so fast that what the central bankers say one day may not count the next. So, while Powell sits in the camp that negative rates are not warranted – he has been consistent on this message – it makes some sense for Powell to be vague enough to keep negative rates as a future option.
He can remove pricing from the fed funds future by lifting interest earned on excess reserve (IOER) by 5bp. However, with yields on 2- and 5-year Treasuries at record lows, in turn supporting sentiment more broadly, and reducing the appeal of the USD, it has pushed traders out the risk curve. Therefore, it makes sense for Powell to be somewhat vague on the subject.
As the week rolls on front-end yields (2 and 5-year USTs) could matter for the USD this week and presumably for gold too, which maintains the 1738 to 1675 range. USDCNH continues to be a central focal point and barometer of sentiment towards the US-China relationship, while inflation expectations and implied vol continues to be central too.
Good luck to anyone trading the Bitcoin Halving today, with price trading lower into the event. It seems we are seeing a buy the rumour, sell the fact scenario play out before the fact it seems.
Inflation expectations falling hard, higher implied volatility (the VIX closed at 43.8%), with selling seen in the CAD and the NOK. We’ve seen traders net sellers of risk though Asia, although the crude price has lifted somewhat through the day.
Despite the various news flow though Asia, the discussion with clients remains on the moves in crude price. Here’s a few views on what went down:
Hello negative crude futures prices
Many have been introduced to the concept of negative commodity prices for the first time, something that is not unheard of in physical commodity markets, although, it’s rare for crude to go negative and has never happened before in crude futures markets.
That said, in recent times, we’ve seen negative prices in (physical) Western Canadian Select and Wyoming Asphalt Sour blends, and as we can see in this bulletin from Plains Marketing, their advertised purchasing (pricing) rates of various grades of physical crude from producers sit at very low levels.
The moves in the May futures contract have been the talk though, with prices trading to -$40.32 at its worst, before settling at -$32.75. The May contract expires today and rolls into the June contract tonight, for those who don’t roll or close can take delivery of the physical on 1 May.
The contango (i.e. the steepness) seen between the May and June futures contracts ballooned out to a record level $58.06 at one stage (see Bloomberg chart below), although has come back into $19. In a normal contango markets, traders expect to pay up for the next-month futures contracts (as full interest is encapsulated in the price), but if for some strange reason you’ve left it until now to roll it would have really hurt. This is certainly the case many who recently bought into the USO ETF who have felt the roll down in its full force.
(Difference between May and June crude)
The fact that May futures were so weak and so deeply negative going into today’s futures rollover has caught everyone a bit by surprise. Granted, oil traders have not been trading the May contract for days, moving into June futures well before, but the fundamentals were clear and the potential for weak prices elevated.
The oil dynamics in play
We know demand has dropped off a cliff given the sheer downturn in global economics that is likely going to result in a sizeable global oversupply of crude, which many believe will be close to 9m b/d through Q2 – importantly, the OPEC++ agreement to cut back on supply doesn’t kick in until 1 May.
And in the US, specifically, which of course is the backdrop to which WTI crude reflects, there are fewer places to store oil. For example, crude stocks at Cushing (Oklahoma) sit at 55mm barrels and around 25% away from hitting capacity although other facilities are even more constrained.
Testing the capacity limit seems likely given the trajectory in the massive inventory build (in the US) over the past four weeks, which has promoted the storage issue to the forefront of trader’s considerations. It can be expensive to shut down wells, although, we have seen the US oil rig count falling 35% since mid-March.
But it isn’t enough to change the supply/demand imbalance. Logistics also make a huge impact, because we know WTI production is landlocked and transferred via pipelines, so this dynamic offers less flexibility when it comes to storage – if you’re an oil producer and have excess capacity and the refineries (you’re selling too) have no immediate need for the product you may pay them to take the crude off your hands – hence we get negative oil prices.
Logistical difference between WTI vs Brent crude
These logistical dynamics are different in the physical Brent complex which is waterborne and can be readily transported out of the US and into China, Asia (more broadly) and into Europe.
The fact that this shipping process can take a greater length of time is also quite appealing for refiners and a further reason why Brent crude trade as a premium to WTI crude. Consider a Chinese refiner can buy Brent crude and know that by the time they receive the delivery in several weeks, global supply cuts may have kicked in, and even signs of demand may emerge. WTI delivery occurs is a matter of days, so once you have bought the crude, it’s with you before market dynamics can change.
Can we see support for June crude?
So, while the media focus has been on the May futures move, the reality from oil traders is that June is where we should be looking, as the open interest has been five times this of May and volumes in the June contract have been staggering, even for the rollover period. The question then evolves to what keeps the June price from cratering in the near-term?
Well firstly, the OPEC++ cuts will likely be pushed forward from 1 May. Donald Trump has said the US is looking to add as many as 75 million barrels to the US’s Strategic Petroleum Reserves (SPR), which would take some of the excess capacity from the market.
Trump is also talking about stopping shipments of crude from Saudi Arabia, which will support near-term. Price will tell, but demand is unlikely to come back anytime soon, and we are about to see the real economic weakness in the April and May economic data flow.
So, the move in May futures is unprecedented but the supply/demand dynamics, married with storage issues and the futures expiry created a perfect storm. The big issue for the market is what measures will be put in place now to counter a similar move to June and July futures as its clear falling oil prices are not going to sit well with risk assets. The forward curve tells us that better times are ahead, but it doesn’t mean we’re not in for another volatile period for the near-term contracts.
The dollar fell against all the major currencies, but not by that much.
For the year as a whole however, the dollar was up. What’s really noticeable though is the narrow range of currencies during the year. They ranged from -5.2% for SEK to +4.3% for CAD. By comparison, last week’s best performer, NOK, was up 1.8% vs USD during the week – comparable in magnitude to its overall 2019 performance of -2.0%.
The main reasons for the sluggish volatility in 2019 were economic and monetary policy convergence. I expect less of both in 2020, for two reasons:
The US-China trade war is dying down. That means economies should recover, but at different paces.
Inflation seems to have bottomed. As it accelerates, countries are less likely to cut rates (which tends towards convergence, as rates can only be cut just so far) and maybe, possibly, conceivably some countries could start thinking about hiking rates, which would encourage monetary policy divergence.
I look for Germany, with its dismal economic performance recently, to be a major beneficiary of increased global trade. In addition, the European Central Bank (ECB) is seen as having a relatively high probability of hiking rates in 2020, although frankly I would be astonished if they did – I think maybe these figures are distorted by end-year factors and don’t reflect actual market views.
On the other hand, the dollar on average rises ahead of a US election, although the average may not have much meaning in this case when the dispersion is so great. Still, I think Trump has been such a disaster for the US and the world that any indication that he might be removed from office, either by impeachment or election, should help the US currency.
This week: a becalmed holiday market likely
The main feature this week of course is the New Year’s holiday. Most of the world will be off on Wednesday, New Year’s day, while Japan will be off Tuesday through Friday. New Zealand and Switzerland will be off on Thursday as well as Wednesday. In any case, I expect a lot of people will take the week off and markets will be thin.
Not only is there a major global holiday, but in addition there’s only one major US and one major EU indicator out during the week. No central bank meetings and only the minutes from the latest FOMC meeting out on Friday (plus a couple of Fed speakers that day). It looks to be pretty dull!
However, beware. On average, the last and first week of the year have slightly higher-than-average volatility, but not terribly so.
But occasionally they are the most volatile weeks of the year, probably because the market is so thin. As long as nothing untoward or unexpected happens, you’re probably safe spending your time a) partying and b) recovering from partying, but you might want to cover any open positions just in case.
This week’s indicators: final PMIs, FOMC minutes
The indicators, such as they are, are the final manufacturing purchasing managers’ indices (PMIs) for the major economies as well as the PMIs for those countries that haven’t announced yet. In addition, the Institute of Supply Management (ISM) announces its manufacturing index. For the US, we also get the Conference Board consumer confidence index on Tuesday, while in the EU, we get German CPI and employment data on Friday.
The final manufacturing PMIs are normally expected to be unchanged from the preliminary versions – that is, the preliminary version is as good a prediction of the final version as any. One exception this month is that the UK manufacturing PMI is expected to be revised up slightly to 47.6 from 47.4. I doubt if it will make any difference however.
The ISM manufacturing PMI, out on Friday, is expected to rise notably, but still be below the “boom or bust” line of 50. By comparison, the Markit version of the same index didn’t fall below 50 during 2019. It was more or less unchanged in December, which makes me wonder why the ISM version should rise sharply during the month. If it does anyway, that’s likely to be positive for the dollar.
The Conference Board consumer confidence index is expected to rise slightly. This is no surprise as consumer confidence is basically a function of the stock market and the unemployment rate, both of which are going in the right direction. Maybe it also reflects hope that Trump gets kicked out of office? USD positive
The minutes from the 11 December FOMC meeting will be released Friday afternoon. I doubt if the discussion of the economic outlook will turn up anything new, as most Fed officials who’ve spoken since the meeting have largely endorsed Chair Powell’s message that monetary policy is in the right place barring a “material reassessment.”
One point of interest will be what it would take for the Fed to hike rates. Powell raised the bar for hiking significantly when he said, “I would want to see a significant move up in inflation that is also persistent before raising rates to address inflation concerns.” However, he was careful to note that that was his own view. It will be interesting to see what the views on this important point are among the other committee members.
The market will also want to see the discussion about the Fed’s policy review. This review may well result in a change to the Fed’s inflation target away from a “hard” target of 2% to more of a “soft” target, such as “2% over time” or other way of allowing inflation to rise above 2% temporarily to make up for times that it was below 2%. Any move in that direction would probably be negative for the dollar as it would reduce the odds of a rate hike any time soon and indeed could increase the likelihood of a cut, since there would be less concern about overshooting the target.
There are a few Fed speakers on Friday: Richmond Fed President Barkin (non-voter/hawk), Dallas’ Kaplan (voter/neutral), Fed Governor Brainard (voter/neutral), San Francisco’s Daly (non-voter/dove), Chicago’s Evans (non-voter/dove) and However, only Barkin and Kaplan are likely to comment on the outlook for policy.
The other three will be appearing on a panel discussion at the American Economic Association meeting to discuss women in central banking, although they may say something of interest to the market during the Q&A session.
Other US indicators out during the week include advance trade balance and pending home sales on Monday.
As for the EU, the main point of interest will be the German inflation data on Friday. Inflation is expected to pick up notably during the month, which should be bullish for EUR.
The German employment data and Eurozone money supply, including bank lending, are also going to be released on the same day.
There are no major indicators out for Japan, Canada, Australia or New Zealand. Pretty dull!